The Modern Market Economy

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Transcript of The Modern Market Economy

The Modern Market EconomySimple Circular FlowImproving Market PerformanceProviding Public GoodsProviding Economic Security, Equity, and SustainabilityConclusionMain IdeaIn modern market economies, government participation can support market exchanges and improve economic performance. Before there was adequate government law enforcement to prevent it, people would get away with "selling" the Brooklyn Bridge, even though they didn't own it.Buying Goods and Services in Product MarketsTo provide public goods and enforce laws and regulations, governments do their own shopping for products made by private firmsEx. The U.S. government at various levels goes to the product markets to buy firetrucks, police cars, and fuel for these vehicles; computers, furniture, and supplies for public schools; and airplanes, uniforms, and food for the military.Producing Goods and ServicesIn addition to buying products, governments produce goods and services for use by households and firmsEx, to produce the service of national defense, the U.S. government buys and rents land for military bases and hires the labor of soldiersThe government buys resources in the factor markets, and makes factor payments that end up as income for the households that supplied the resources

Government's Role in a Market EconomyThe government can contribute to a market economy in several ways:establish and enforce rules that improve market performanceprovide important goods and services that private individuals tend not to purchasehelp improve economic security, equity, and sustainability

Households, Firms, and MarketsTwo most important categories of decision makers are households and firmsHouseholds - an individual or a group of people who live together and share income, such as you and your familyFirm - generally referred to as a business; a privately owned organization that produces goods or services and sells them to othersGovernment in the Circular FlowIn the process of enforcing rules, providing public goods, and working toward the goals of society, the government takes in money, products, and resources; thus making the government a key player in modern market economies.As households buy goods and services from firms, and firms buy or rent resources from households, a circular give and take relationship is formed.

The Circular Flow Diagram - illustrates the interactions between key players in the economyCollecting Taxes and Making Transfer PaymentsTo fund their activities, government collect taxes from households and firmsSome tax revenue is spent in product markets on things like firetrucks, some is spent in factor markets on things like military personnel, and the rest is spent on transfer payments to households and businessesTransfer Payments - expenditures for which the government receives no good, service, or resource in return.The majority of transfer payments are made as part of the social safety net to support disadvantaged individualsGovernments use these transfer payments to improve equity and economic securityDecisions are made withing each country about the size and intention of government involvement.